Benefits of Third Party Lease Review
One of the dilemmas that in-plant printers have always faced is managing around the ironclad lease agreements forced upon them by capital equipment manufacturers and primarily the digital print engine suppliers. This is not to suggest that any of these suppliers have delivered lemons or won’t provide the expected and contracted for maintenance support.
Generally speaking with on-going supplier maintenance the basic equipment has hopefully performed as expected. This last point is difficult to ascertain however as the law suit settlement has always included a nondisclosure clause hand-cuffing or “mouth-cuffing” the printer from ever describing their problems with the equipment and the actual settlement features. The number of lawsuits during the last decade has been increasing and may be surprisingly high to many readers. These litigations are always initiated by the manufacturer against the private sector printer for failure to pay contracted fees. The printer, at their attorney’s advice, puts the monthly fee into escrow until the problems are resolved or rectified. In short order the manufacturer sues.
Very few public sector in-plants are allowed to follow this litigatory course of action. The in-plants are forced to live with the suppliers’ unfulfilled promises because the public sector does not have funds available to fight a legal battle. However, during the National Government Printers Association conference in 2005 more than one state printer representative described their successful efforts of keeping this well known manufacturer off the bidding list for a year because of their nonperformance.
This manufacturers’ army of attorneys worked nonstop to get their name back on the qualified bidders list for the next round of bid solicitations. Again it was not a changed management philosophy toward a more amenable and longer term customer relationship perspective that got them back on the list. It was relentless legal wrangling by the manufacturer against the state purchasing entity. This was a short-lived though welcome victory for the in-plant, which they readily tell anyone within earshot.
The tip of the iceberg of the problems is well known. For example, the problem consistently arises when volume unpredictably fluctuates – spikes and falls – and the basic printing needs change before the life of the lease is up. The lease contract dictates fixed monthly or quarterly minimum charges regardless of lower volumes. Also premium prices are levied above the all inclusive charges when volume spikes back up the next period. To convert to the annual volume equivalent “is not possible.”
Again most all of the digital print manufacturers have historically and consistently introduced new equipment and/or software which has been faster, cheaper, better than they locked in their clients on only a few months before. Upgrades are certainly possible, but never at a reduced price even when the upgrade sells for less money.
One of the most frustrating case studies was presented during the MFSA-NAPL Fulfillment Conference of 2006. A Philadelphia printer bought the unused and unopened branded toner supplies from a bankrupt competitor at a heavy discount. The manufacturer sued this entrepreneur because their contract stipulated that only toner purchased from the manufacturer was permitted.
The University of Central Florida’s in-plant printing department, which was responsible for managing the remote digital copier contracts throughout campus, came up with the best solution ever witnessed by this author. Every corporate entity thinks that by bundling all of their digital printer business into a single multi-year contract that they will get the lowest price due to this economy of scale. In reality after a hundred or so units there really is no or certainly limited incremental economy of scale.
The UCF in-plant manager convinced the university’s purchasing department to split this three-year contract between the two “best” vendors bidding. This simple, though brilliant idea incorporated the very best aspects of the free enterprise spirit into this legal arrangement. The “carrot” that was held out to the two winning vendors is that new equipment coming on line during the life of the contract would be awarded to one of the two vendors. This decision was based upon (1) whose service records were measured to be the best by periodic client surveys and (2) whose new product offerings were determined to best meet the dynamic needs of the university.
The competition between the service technicians of these two manufacturers to assure timely response to service calls had never been better. Instead of seeing the digital print sales person every three years when the single huge contract was due to be rebid, these sales professionals were on the in-plant manager’s doorstep at the first new product announcement. It was quietly reported that many of these new products were installed at the in-plant print shop “on approval.” This allowed the new features and capabilities to be experienced first hand rather than the traditional speculation based upon product literature and sales promises.
While most every college and university could easily follow this UCF model with equally good results, many corporate entities may not have the economy of scale to take advantage of this “split-and-conquer” approach. Actually this article is intended to highlight an altogether different course of action that will benefit every printer – in-plant and private sector – regardless of size. And that is the use of an independent third party expert to review each lease prior to its initiation or during the lawsuit due diligence if need be.
Often the equipment lease is written by the manufacturer’s general counsel with the express purpose of protecting the supplier, locking in the customer, and maximizing its revenue streams by whatever legal verbiage possible. Capital equipment manufacturers legal departments go to great lengths to fine-tune this expertise.
Other times, equipment manufacturers do not choose to run their own leasing operations. They form joint ventures with international financial institutions, banks and independent leasing companies. These firms have full time legal, credit, lease and asset management departments whose only business is leasing. These highly skilled lease professionals write iron-clad contracts that maximize financial returns for their benefit and that of their manufacturing partners. It is common knowledge, for example, that the financing arm of General Motors, i.e., GMAC, has always made more money on a margin basis than the auto manufacturer itself.
Virtually every printer turns these manufacturers lease agreements over to their own general council for edit and review. The first problem is that these lawyers are virtually never experts in equipment lease law verbiage. They are generalists not specialists. And the most important problem is that these attorneys never understand the digital printing needs of their corporation and caveats borne from the dynamic unpredictabilities of the printing business.
The pot of gold at the end of the rainbow is to find a third party leasing expert. This individual should not work for any leasing company, lease broker, or equipment vendor. They should be able quickly to assess the printer’s digital printing needs from a straight forward though thorough needs assessment survey. And then they review the manufacturer’s proposed lease for a multitude of phrases that turn out to be untenable “gotchas” that are most certainly not to the printer’s benefit. Quite often the expectant buyer is not even aware of the interest rate they will be paying, which - believe it or not - is occasionally exorbitant.
From this review a report is prepared listing vulnerable sections and clauses and the proposed more amenable alternate wording. The printer or purchasing agent can then negotiate with the supplier if they wish.
This in house negotiation step is fraught with its own frustrations, as the supplier knows that there are only days before the existing lease expires and the new one must go into effect or further usurious fees are enacted from the old lease! Automatic renewals sometimes as long as 12 months may be enacted if proper notification lease requirements are not taken. In other words, request the standard equipment lease from the supplier at the time “they submit their RFQ response, which is 60 days or more before the old lease expires, or their bid is considered nonresponsive.” (The game can be played both ways!)
Many printers find that the most successful methodology is to have this third party lease expert negotiate these new preferred terms for them. This is often done in a conference call with both the printer and expert talking to the manufacturers’ lease department. This is the first time that the printer will discover a delightful surprise. (All other surprises described in this article have intentionally been horrific though unfortunately too often realistic.)
The delightful surprise is that the manufacturer’s leasing department is often delighted to negotiate the terms of the lease, particularly with another professional who understands what the gobbledygook actually means. There are two other opportunities to negotiate a lease agreement after the agreement has been signed and is inforce. The first is during the due diligence of a merger or acquisition and involves the leases of the firm to be acquired. The second is a lease of a firm undergoing foreclosure. Under both of these circumstances the equipment manufacturers have been reported to be eager to discuss more amenable terms.
So where do you find this lease expert? Go to reviewyourlease.com or call Mary A. Redmond, President of Independent Lease Review, at 913-441-4108. Ms. Redmond is an NAPL Associate Consultant.
Tim Fisher, NAPL’s Executive Vice President and head of the Association’s Professional Services Group, suggests that the more professionally managed graphic communications firms have their leases “managed” by this lease expert service. In other words for a modest retainer fee the salient “lease decision” dates are maintained in a data base so that the printer can be forewarned about upcoming decisions that must be made. If a decision is not made in a timely fashion as dictated by the terms of the lease, an automatic renewal of 12 months may kick in.
Additionally firms from other industries have found that having this lease expert actually prepare a Lease RFQ based upon the firm’s specific needs is the best of all solutions. This proactive RFQ is the basis for the ultimate lease agreement.
This highly specialized expertise has proven time and again to deliver cost savings of many times the original investment.
  In-Plant Graphics | [Read this article as it appears online at In-Plant Graphics - Jan. 01, 2008] |
